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November 02, 2009

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Firstcall India Equity Advisors Pvt Ltd

INDIAN SOLAR POWER SECTOR

SECTORAL REPORT

Janaki Rao.U

AnalystEquity Research Desk

V.S.R. SastryVice PresidentEquity Research Desk91-22-25276077 [email protected]

Dr. V.V.L.N. Sastry Ph.D.Chief Research [email protected]

Highlights

• Solar energy is today one of the ‘hottest’ sectors for investors lookingfor opportunities in India. Billions of dollars in investments areexpected to materialize over the coming months, as top Indianbusiness groups unveil ambitious plans for a sector that is glowing red-hot.

• India has emerged as world number one, along with the United States,in annual solar power generation, according to a survey by McKinsey & Company, which stated that India has one of the world's highest solarintensities at 1,700 to 1,900 kilowatt hours per kilowatt peak of installed capacity.

• The Indian government is offering incentives, including financial

subsidies and equity participation adding up to 20 per cent of capitalexpenditure in the first 10 years – for projects in special economic

zones (SEZ) – and 25 per cent in non-SEZ areas.

• The Indian government, which unveiled its semiconductor policy lastyear, announced a special incentive package for potential investors intechnologies that will help generate solar energy.

• The government has received seven proposals adding up toinvestments of about $16 billion to set up manufacturing units for poly-silicon, single and multi crystalline ingots, wafers, solar cells, photo-voltaic modules, etc.

• The Prime Minister’s Council on Climate Change approved the National

Solar Mission, which aimed at solar generation target of 20,000Megawatt by 2020.

• The enormous potential in energy generation running into severalhundred Giga Watts with current solar technologies. As the cost of building solar capacity continues to fall over the next five to 10 years,a significant scale-up of solar generation (in multiples of tens of GW) isa very realistic possibility in India.

• India is fortunate to have solar radiation for approximately 300 days ina year (in many parts).

• By 2011-12, advanced technology should help Signet lower the cost of production to about five cents a unit, which is the current grid power

cost.



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CONTENTS

1. Sector Overview

2. Current Trends

3. Profile of top three Indian Companies

4. SWOT Analysis

5. Conclusion



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1. Sector Overview

Solar energy is today one of the ‘hottest’ sectors for investors looking for opportunities in India. Billionsof dollars in investments are expected to materialize over the coming months, as top Indian business

groups unveil ambitious plans for a sector that is glowing red-hot. The Indian government, whichunveiled its semiconductor policy last year, announced a special incentive package for potentialinvestors in technologies that will help generate solar energy. The government has received seven

proposals adding up to investments of about $16 billion to set up manufacturing units for poly-silicon,single and multi crystalline ingots, wafers, solar cells, photo-voltaic modules, etc.

The Union Ministry of New and Renewable Energy (MNRE) is targeting an additional 14,000 MW powerthrough renewable resources (including solar power) by the end of the Eleventh Five-Year Plan (2012).About $150 million has been allocated for research, design and development in the energy sector in the11th Five Year Plan, as compared to less than $20 million in the previous plan.

Reliance Industries has submitted a plan to set up two manufacturing facilities – for semiconductorsand polysilicon, both used for making solar panels – with a total investment of about $7.5 billion. Thegroup plans to set up the poly-silicon, solar-grade wafers and solar PV modules factory (at a cost of about $2.9 billion) in Jamnagar in Gujarat, where it already has a refinery. The other plant will be asemiconductor fabrication unit with assembly, test, mark and packaging (ATMP) facility and would bebuilt at a cost of over $4.6 billion. Reliance Industries has ambitious plans for the sunrise sector. It is

planning to set up a 10 MW solar facility in West Bengal. State-owned Bharat Heavy Electricals Ltd isalso keen on a joint venture with Reliance for setting up solar fabrication units.

Half a dozen other companies, including Videocon Industries ($2 billion investment envisaged), MoserBaer PV Technologies ($1.5 billion), Titan Energy System ($1.47 billion) and KSK Energy Ventures($800 million) have submitted proposals to the government. The Indian government is offeringincentives, including financial subsidies and equity participation adding up to 20 per cent of capitalexpenditure in the first 10 years – for projects in special economic zones (SEZ) – and 25 per cent innon-SEZ areas. Indeed, there is an unprecedented Brush to tap solar energy as investors formulateprojects to manufacture components that would help generate much-needed power for an energystarved World.

The Ministry has also given financial support to about 600 R&D projects in this sector. Other initiativesinclude development of ‘solar cities’ and demonstration programme on MW-size Grid Solar Power

Generation. The government plans to identify 60 ‘solar cities’ and extend financial assistance to reducedependence on conventional energy. According to latest data, 33 grid interactive solar PV power plantshave been installed in India with financial support from the government. These plants, with a totalcapacity of 2.12 MW, are projected to generate about 2.55 million units of electricity annually. Otherthan this, 1.45 million off-the-grid solar PV systems, comprising 125-MW capacity, have been installed,leading to a prospective 150 million units per year. Another 2.15 million square metre of collector areahas been installed for solar water heating applications. Even state governments are taking keen interestin the development of alternative energy sources with focus on solar power. The MNRE promoteddeployment of nine solar energy plants in six states during 2007-08. Maharashtra tops the list withthree plants, with Jammu & Kashmir at two. Other states with one each include Chhattisgarh, Haryana,Orissa and West Bengal.

The Ministry has also announced anew programme designed to expand solar power generating projectsup to a maximum capacity of 50 MW and various for the private sector. For example, entrepreneurs

who build, own and operate solar projects will be offered financial incentives of about 30 cents for eachkilowatt of solar power generated per hour. Incentives for thermal power fed to power grids would beslightly lesser. Research and development is also being encouraged to improve their performance andreduce the consumption of materials. Interest subsidy is being provided on soft loans to users andmanufacturers. Concessional or nil import duty on some of the raw materials, components and productsis also being offered along with excise duty exemption and 80-100 per cent accelerated depreciation inthe first year.



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The growth in sustainable energy is expected to continue. To achieve the clean energy targets in its

11th Five Year Plan, the reports points out, wind will need to grow by 2.5GW in each of the next threeyears to meet the goal of 17.5GW by 2012. Small hydro has an additional 1.1GW to be commissionedto meet the 3.4GW target. There were no grid-connected solar projects commissioned in 2008, but apipeline of 222MW of solar projects was announced in 2008. Biomass needs to double to reach the3.5GW target for 2012. As of now, India generates about 500 MW of energy from solar sources.

Sustainable energy investment in India went up to $3.7billion in 2008, up 12% since 2007. It includedasset finance of $3.2 billion, up by 36%. Venture capital and private equity saw an increase of 270% to$493 million. Mergers and acquisition activities totaled $585 million. Most acquisition activity wascentred on biomass, small hydro and wind projects.

The country’s per capita emission of Greenhouse Gases (GHG) will continue to be low until 2030-31,and it is estimated that the per capita emission in 2031 will be lower than per capita global emission of GHG in 2005.

Current Trends

• The Prime Minister’s Council on Climate Change approved the National Solar Mission, which aimed atsolar generation target of 20,000 Megawatt by 2020.

• As of now, India generates about 500 MW of energy from solar sources.

• The country’s per capita emission of Greenhouse Gases (GHG) will continue to be low until 2030-31,

and it is estimated that the per capita emission in 2031 will be lower than per capita global emissionof GHG in 2005.

• The government is considering a regulation to make use of renewable energy mandatory for specialeconomic zones (SEZ) to save on traditional fuel like coal and diesel. The Ministries of Commerce & Industry and New & Renewable Energy are working on the modalities for such a regulation.

• A regulation needs to be put in place making it mandatory for use of renewable energy in the SEZs,which would result in saving of energy. Every SEZ developer should create a mechanism forproducing 1 KW (kilo watt) of renewable energy for one hectare of development in the SEZ.

• The Dharwad-headquartered Karnataka Vicars Grameen Bank (KVGB), which has financed over12,000 solar light units under its area of operation, is now planning to make 80 villages solarvillages.

• The governments of India and UK are tying up for research on solar energy which will be jointlyconducted by British universities and IIT and which will be funded by the governments of bothcountries.

• Natural Energy Processing Company (NEPC) India Ltd is planning to set up a special economic zone

(SEZ) at Palladam near Coimbatore with an investment of around Rs 2,000 crore (US$ 415.6million). The company is planning to set up solar and Photo Voltaic plant in the SEZ.

• Tata group has invested in Swiss solar-cell maker Flisom, which is setting up a 5 megawatt (MW)plant in Duebendorf for about €25 million (US$ 36.81 million).

• The Centre is planning a project along with the Institutes of Information Technology (IITs) to reducethe cost of production of alternative energy to a significant level so as to promote the use of renewable energy and reduce dependency on the known energy sources.



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Profile of top three Indian Companies

1. TATA BP solar Ltd

Tata BP Solar is a Joint Venture between Tata Power Company, a pioneer in the power sector and BPSolar one of the largest Solar Companies in the world over the years; Tata BP Solar has built on this

rich lineage to become one of the largest Solar Companies in Asia. Tata BP Solar uses state-of-the-arttechnology to offer high quality, innovative solar solutions that cater to the needs of individual

customers, large institutions as well as entire communities.

Tata BP Solar, one of the early movers in the private sector, does not just produce solar modules, butoffers complete and customized solutions. In addition to selling a solar street light module that costs$260, the company also bundles batteries, automatic electronic switching systems, the pole and eveninstallation and other services at a cost of $540. Solar Semiconductor, which has offices in the US anIndia, plans to expand manufacturing capacity from 50 MW to 200 MW through a billion-dollarinvestment.

Tata BP Solar is planning several strategic diversifications to complement and augment its currentproduct mix, which will be in harmony with the policy of being market leaders in Solar Photovoltaic andSolar Thermal Systems through constant quality improvement, innovation and customer satisfaction.

Major Products:



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Strong Financials

Despite an acute, industry-wide “silicon shortage’, the global Solar PV Industry is poised to continue itsrapid growth in years to come. Reflecting this global optimism is Tata BP Solar. Its Sales History hasbeen dramatic – from a modest Rs.16 million in 1991-92 to a phenomenal Rs.9098 million in 2007-08.Export sales have been encouraging too – from Rs.1 million in 1994-95 to Rs.6415 million in 2007-08.



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2. Moser Baer India Limited

Moser Baer is one of India’s leading technology companies. Moser Baer's flagship company, Moser Baer

India Limited (MBIL) has successfully developed cutting edge technologies to become the world’ssecond largest manufacturer of optical storage media.Moser Baer Photo Voltaic Limited (MBPV) and PVTechnologies India Limited (PVTIL) are subsidiaries of MBIL and were launched between 2005 and 2007

with the primary objective of providing reliable solar power as a competitive non-subsidized source of energy. They have leveraged their core competencies in high volume manufacturing of optical mediaproducts to create a world class photovoltaic manufacturing facility. Their strategy is to straddlemultiple technology platforms and to drive scale to be able to drive down the costs of the technologyand make it more affordable to consumers globally.

• Global presence with products sold in more than 82 countries

• Present across the entire value chain and investments in multiple PV technologies

• A combination of advanced technology & low cost manufacturing expertise, with fully automatedproduction facilities ensures top quality products

• Current production capacity of 80 MW Crystalline Cells, 80 MW Crystalline Modules, and 40 MW Thin

Films with expansion plans in place

• They also have an initial capacity of a few megawatts in Concentration PV, which is being rapidlydeveloped for the market and has great cost reduction potential

• Products meet international standards including UL, IEC, ETL, CE

• Strong commitment to R&D and innovation

• It is also looking at solar power projects in Karnataka, West Bengal and Jammu and Kashmir.

• It is developing a one megawatt solar project in Chandrapur, Maharashtra. It has been awarded theEPC contract to this effect by Mahagenco, a Government of Maharashtra power generation company.

Particulars FY09 FY10E % Chg.

YoY

Net Sales (Rs. Mn.) 22884.8 26317.5 15.00

Net Profit (Rs. Mn.) -1285.4 1563.3 221.62

EPS (Rs.) - 9.2 -

P/E (x) - 8.1 -



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3. XL Telecom & Energy Limited

XL Telecom & Energy Limited. The Group's principal activity is to provide telecommunication services.It's product includes CDMA mobile handsets, ethanol, swith mode power supply power plants -100amps, solar power generating systems and sleeves. The Group operates through three segmentsnamely CDMA Mobile phones, SMPS Systems and Ethanol. Its customers include TATA, Reliance, BSNL,

MTNL, Nortel, ERRICSON and Kyocera, Axesstel. The Group's plants are located at Hyderabad andMaharastra.

Solar-Division

XL Telecom is one of the leading Indian manufacturers of Solar Photovoltaic Modules, established in

1992. XL has over 17 year's experience of manufacturing its Solar Photovoltaic Modules and systems tovarious agencies in India and overseas. Production Capacity:

Module Production:

Due to rapid growth of the Solar Industry, XL Telecom has successfully ramped up its modulemanufacturing capacity to enable production of crystalline modules. Present production capacity is 192

MW per annum.

Crystalline Cell Production:

XL Telecom is installing state of the art Crystalline Cell Manufacturing Facility with leading Technologysupport from Germany. The present installed capacity of the cell plant will be 120MW per annum.Also

XL Telecom is installing 40MW new line of module manufacturing facility with Technology support fromGermany. With this additional facility the total module production capacity will be 232MW per annum.

This new facilities of Cell Line & Module Line will be operational by the end of Q2 of 2009 at SpecialEconomic Zone (Fab City), Hyderabad in India.

The company is setting up a solar photovoltaic cell manufacturing plant with a capacity of 120 MW per

annum. It has a three-year exclusive distribution agreement with Forta Im Ex SL, Italy to deliver aminimum of 3 MW solar modules per annum to Europe and collaborations with Alfa Laval, Axesstel,Corning and Kyocera Wireless.

Particulars FY09 FY10E % Chg.

YoY

Net Sales (Rs. Mn.) 4093.2 4502.5 10.00

Net Profit (Rs. Mn.) -2318.3 119.6 105.16

EPS (Rs.) - 6.3 -

P/E (x) - 5.2 -



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SWOT Analysis

Strengths

• Solar energy is very cheap compared to other technologies. It is also renewable unlike coal orthe rest which are non-renewable and hard to maintain.

• It is safe, cheap and good for the environment.

• World PV production

• Indian PV Export

Weaknesses

• No national roadmap

• No Large size installation

Opportunities

• Increasing Energy requirement Reduction of Fossil Fuels

• Increased awareness of green technologies amongst the public

• Overall cost of the energy technology decreases with large scale utilization

• This has also encouraged the entrepreneurs to invest in solar energy technologies.

Threats

• Will depend on US, Japan and Europe for efficient technology solutions

• Energy dependence on imports

Conclusion

The future for the solar energy industry in India indeed looks promising.The strong market potential forsolar panels in markets in Germany and in the US. The relative low-gestation project and high returnsare one of the reasons for companies to enter in to this business.

_______________________________________________________ Disclaimer:This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other sourcesbelieved to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such .Firstcall India Equity Advisors Pvt.Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any

inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an

investment decision.



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Firstcall India Equity Research: Email – [email protected]. Harikrishna Banking

B. Prathap IT

C.V.S.L.Kameswari Pharma

U. Janaki Rao Capital Goods

E. Swethalatha Oil & Gas

D. Ashakirankumar Automobile

A Rajesh FMCG

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